PSG eyes post-Covid discount purchases
PSG, which is handing the majority of its holding in its most valuable asset, Capitec, to shareholders, will be ready to exploit “significant opportunities” presented by the Covid-19 pandemic, the CEO of the investment company, Piet Mouton, says.
“We are not going to rush into anything, but we have seen some very interesting transactions coming across our desk. This period could provide a unique opportunity for those with capital,” Mouton said. He was speaking a day after the group announced a proposal to unbundle its stake in Capitec, one of the corporate success stories of postapartheid SA.
The potential for PSG to increase its stakes in existing investments, which include the likes of private education provider Curro, asset manager PSG Konsult, and Zeder, an agricultural company, is being actively considered, Mouton told Business Day.
PSG announced it is to unbundle a 28.1% stake in Capitec – equivalent to 32.5-million shares – subject to the necessary approvals. This would leave a 4.3% stake in the bank, provid
ing it with dividends once they resume after being halted in line with recommendations from the Reserve Bank, and the ability to sell the shares at a future date if required.
An economy that is being battered by the arrival of Covid19 and the subsequent lockdown might also provide fertile ground for companies with strong balance sheets as potential targets become cheaper.
The Competition Commission has said it is preparing for a deluge of merger applications expected as a result of the financial crisis.
“We think it ’ s going to be tough to raise equity and debt in this market given the uncertainty around Covid-19, and we wanted to make sure we could provide capital to our investee companies under a range of scenarios,” Mouton said. PSG will be left with R1bn after using another R1bn to pay off debt.
The group has previously cited forthcoming regulation that will define PSG as a financial conglomerate as one of the primary reasons for unbundling its large stake in the bank. The definition will impose regulatory and administrative burdens on PSG that will prevent it from acting as a “nimble and dynamic” investment holding company.
But replicating the performance of Capitec will take some doing. Based on Thursday’s closing price of R890.28 per share, R1,000 invested in the bank in 2000 was worth R640,485 yesterday. The same investment in Standard Bank, the continent’s largest lender, would be worth R5,256. No wonder Mouton says it was an “extremely tough” decision to unbundle.
PSG closed on the JSE at a two-month high on Thursday at R168 per share.
“Capitec is a phenomenal business and we think it’s one of the best that has been built in the country in the last two decades, but the new regulations were looming, so we took the decision to proceed.”
The other reason for the distribution was the persistent and increasing discount at which PSG shares traded relative to the sum of the stakes in its various investments. The discount “irritated” the group’s executives, Mouton said.
“We started referring to the discount as the ‘champagne’ issue. This was because despite the tough environment, Capitec kept on delivering stellar results and consequently became such a large component of our value,”
Mouton said.
With Capitec also listed and accounting for 68% of PSG’s value, investors could have easily owned the stake directly.
Peter Armitage, founder of Anchor Capital, said: “They have shown they are prepared to consider things and undertake shareholder-friendly initiatives. The share price has reacted positively to news of the unbundling, but probably not as much as they would have liked.”
Armitage said he thinks the discount may well persist past the unbundling as it is a global trend that investment holding companies currently trade at substantial discounts to their intrinsic value.
“There are too many entry points into PSG, and PSG Konsult will account for half the value of PSG. I think only when investors want to pay up for the group’s unlisted investments, will the discount begin to substantially narrow.”
It is plausible that if PSG thinks Curro is as promising now as it thought it was before Covid-19, buying out minorities at the current share price will make a lot of sense, Armitage said. Curro has lost 69% of its value in the past year.
4.3% What PSG will be left with after disposing of its 28.1% stake in Capitec, along with R1bn in cash